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Pension versus a lump sum


People who either retire early, change employers or are laid off may have to make a critical decision about their company pension plan. Typically, there are two main choices: 1) take a pension, either right away or starting at a specified date in the future (known as a deferred pension), or 2) take the commuted value of the pension as a lump sum.

The decision is complex, involving non-financial as well as financial factors. Here are some of the considerations we typically discuss with our clients:

Guaranteed income for life
A pension promises a guaranteed income for your life and possibly a reduced pension for a surviving spouse. It may also provide additional benefits such as health, dental and insurance coverage. Some companies adjust pension income to inflation and may periodically make voluntary enhancements. While a guaranteed income offers security, it also means that there is not the same possibility of earning greater income as there is with the lump sum option. The major downside of taking a pension is that it could expire worthless on your death (or that of your spouse), leaving nothing for your estate.

Chance to leave an estate
The lump sum option may appeal to individuals with a high-risk tolerance and significant other assets. It may be appropriate for people who are willing to invest aggressively and bet they will earn more than the pension. People with a short life expectancy or a desire to leave an estate may also prefer the lump sum.

When a lump sum is chosen, the funds must be transferred to a locked-in account or income vehicle, which sets out both a minimum and maximum withdrawal each year. (Note that part of the commuted value may have to be taken as income upon receipt and taxed, thus reducing what you have left to invest.) The major risk of taking the lump sum is that you could outlive your money.

The pension versus lump sum decision is a crucial one for you and your family, and may have irreversible consequences. Our team can help you weigh the pros and cons of each so you can make an informed choice that best reflects your personal circumstances.

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